On 6 December 2023, a five-judge bench of the Supreme Court in Cox & Kings Ltd. v. SAP India Pvt. Ltd. recognized the “group of companies” doctrine as being part of Indian arbitration law. By virtue of this doctrine, “an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such as to demonstrate the mutual intention of the parties to bind both signatories and non-signatories.” [para. 2] The broader impact of this ruling has been analysed in a separate guest post on the Blog. This post confines itself to a discussion on how the doctrine affects the concept of separate legal personality of each company within a corporate group, which goes to the very root of corporate law.
The opinion authored by Chief Justice Dr. Dhananjaya Y. Chandrachud (on behalf of himself and three other judges, with a separate concurring opinion authored by Justice P.S. Narasimha) begins with the conundrum of how the Supreme Court ought to reconcile the group of companies doctrine in the light of well-established principles of corporate (and contract) law. Several interesting questions emerge. Does the group of companies doctrine effectively negate the separate legal personality of companies within a corporate group in order to make non-signatory affiliates a party to an arbitration agreement entered into by one of the companies within the group? Is it necessary to pierce the corporate veil to extend the scope of arbitration proceedings to members of a corporate group who are not signatories to the arbitration agreement? Alternatively, such an extension could be achieved by rendering the entire corporate group as a “single economic unit” or by treating the signatory entity as an alter ego of the non-signatory affiliate. Finally, will the mere fact that a non-signatory is a member of a corporate group thereby make that entity a party to an arbitration agreement entered into by another affiliate member of the group? A close analysis of the Cox & Kings ruling through a corporate law lens will provide answers to these jurisprudential questions.
Sanctity of the Separate Legal Personality
The starting point for the analysis lies in the determination of whether the group of companies doctrine has independent existence under arbitration law or whether it needs to resort to principles of corporate law (such as piercing the corporate veil). The Supreme Court bifurcated the source of the doctrine to “consent-based theories”, such as agency, novation, assignment and operation of law, as well as “non-consensual theories”, such as piercing the corporate veil and alter ego. The grain of the Cox & Kings ruling is that the doctrine is premised on a consent-based approach by which non-signatories are found to have consented to be parties to the arbitration agreement due to special circumstances, even though they have not formally accepted or adopted the contractual terms. This preliminary determination will itself lead us to the conclusion that non-consensual theories emanating from corporate law do not have a role to play. In that sense, clearly the group of companies doctrine is grounded as a matter of arbitration law rather than as something that even remotes disturbs well-established principles of corporate law. Nevertheless, the Supreme Court engages in a detailed analysis of veil piercing law in India, noting in the process that the concept “has been sparingly used”. [para 87]
Interestingly, the Supreme Court also observed that the main purposes of corporate law tools and the group of companies doctrine are rather different. The role of corporate (and contract) law is to determine substantive legal liability (e.g., by piercing the corporate veil), whereas the role of “arbitration law is to determine whether an arbitral tribunal has jurisdiction over the dispute arising between the parties to an arbitration agreement.” [para 95] It is to the latter determination that the group of companies doctrine applies.
The Court also engages in judicial tightrope walking by calling for a “balanced approach without compromising on the basic principles of arbitration law, contract law, and company law to ensure that the resultant legal framework is consistent with internationally accepted practices and principles.” [para 95] Therefore, the implication of the Court’s ruling is that the usual corporate law tools of piercing the corporate veil and the existence of alter ego do not have a role to play in the application of the group of companies doctrine. In other words, the group of companies doctrine makes a non-signatory entity a party to an arbitration agreement while keeping its separate corporate personality very much intact.
Fact-Based Analysis: Not Mere Existence of Group
Given that the group of companies doctrine is embedded in arbitration law, the mere fact that a non-signatory entity is part of a corporate group does not automatically make it a part of an arbitration agreement that another entity in the group has entered into. The application of the doctrine depends entirely on the specific facts and circumstances pertaining to the relationship between the various entities in the group. Here, the intention of the non-signatory is paramount. The Court articulates that while the first step is the existence of a group of companies, the more important second step is whether the non-signatory did demonstrate an intention to be party to the arbitration agreement despite the lack of its formally signing the agreement. The Court noted:
“In multi-party agreements, the courts or tribunals will have to examine the corporate structure to determine whether both the signatory and non-signatory parties belong to the same group. This evaluation is fact-specific and must be carried out in accordance with the appropriate principles of company law. Once the existence of the corporate group is established, the next step is the determination of whether there was a mutual intention of all the parties to bind the non-signatory to the arbitration agreement.
The group of companies doctrine requires the courts and tribunals to consider the commercial circumstances and the conduct of the parties to evince the common intention of the parties to arbitrate. … Consequently, a non-signatory could be held to be a party to the arbitration agreement without becoming a formal part to the underlying contract. The existence of a group companies is one of the essential factors to determine whether the conduct amounts to consent but membership of a group is not sufficient in itself.”
In practical terms, this arises when several entities within a group enter into a transaction with varying responsibilities upon each of them in performing the transaction. Even though not all of the entities are signatories to the arbitration agreement or the underlying contractual agreement, the mutual intention of the parties may suggest that they nevertheless be bound by the arbitration agreement. This is particularly relevant in the context of India where corporate groups are ubiquitous.
Concluding Remarks
Despite a diversity of approaches internationally, the Supreme Court in Cox & Kings reiterated that the group of companies doctrine is an integral part of Indian arbitration law. This, though, is consistent with the growing trend of moving away from the conservative approach that treats privity as sacrosanct. The Court has also situated the doctrine within arbitration law, without upending the separate legal personality of individual entities within the corporate group. It has done so by repeatedly cautioning against the use of corporate law tools such as piercing the corporate veil and that of alter ego for making non-signatories parties to an arbitration agreement, as those tools are essentially focused on imposing liability. Such a detailed analysis of the Court delivers the required jurisprudential clarity on the topic.
At the same time, several questions and concerns remain. Apart from stating that the group of companies doctrine would be applied on a fact-specific basis, there is no further detailed exposition of the types of scenarios where non-signatories within a corporate group would be treated as party to the arbitration agreement. While the Court has sought to put at rest the broader substantive question of the existence of the doctrine and its location, one cannot rule out a further wave of litigation surrounding the application of the doctrine to specific circumstances arising from transactions involving corporate groups. Finally, the more liberal acceptance of the doctrine under Indian arbitration law may have the effect of motivating entrepreneurial litigants in expanding the coverage of parties against whom they may initiate arbitral proceedings.
